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Contract Management: Is it worth investment?


Although senior managers understand that contracts are important, most do not grasp the challenges – or potential contribution – that are associated with contract management. On the surface, it seems such an obvious and straight-forward activity – and therefore struggles to gain investment.

This is the first in a series of case studies on the value of contract management. It focuses on a relatively simple example of contract lifecycle automation and features a software and services company with global operations and annual sales of approximately $2bn.

A successful deployment

The contracts team in this case reports into the legal function and the automation project was sponsored by the General Counsel. “Our deployment of contract management technology means that for the first time we have a shared, centralized and real-time version of truth regarding our commercial relationships. Contract data that once took hours or days to find and assess, or even proved impossible to locate, is immediately available. Through this investment, we have far greater insight and information about our relationships with customers and it is available on-demand not only to my team, but also across finance, operations and sales teams. Because they value this benefit – and now understand what they have been missing in the past – they also recognize the importance of accurate, timely data inputs on new or amended agreements, so we have motivated system users and contributors. For our customers, this means we are able to operate with more accurate information, faster response times and much more intelligent support.”

Was there a business case?

In common with many similar initiatives, producing a fully evaluated business case was not feasible. “We had a largely manual process. There wasn’t an underlying system from which we could extract data. Even something as basic as lead times wasn’t easy to establish. We just knew that the process was slower and less efficient than it could be. We also knew that the worktime of experienced, highly paid staff was often absorbed in finding documents or gathering information that should have been available with the click of a button. Also, extensive efforts were going into fixing issues and problems that really were avoidable – better information, automated alerts would save time, avoid issues and generate better revenues.”

“But in the end, the business case was in large part common sense. We really couldn’t make an accurate prediction of the return on investment because of the absence of data.”

So what are the benefits?

“Perhaps the biggest benefit has been the scale of understanding across the organization that contracts and their management really matters! Suddenly we have data that is making its way into management reports. We have people coming to us seeking data to inform their decisions. The legal and contracts group has taken on a new level of value.”

“Equipped with consolidated data, we are much better at understanding and analyzing customer relationships – for example, multiple agreemens with one customer, or ven searching across customer groups, or industries or geographies. We can recognize differences, compare performance, see areas of risk. Then, when it comes to performance, our work has become far more accurate and proactive; we no longer risk missing renewals, or ‘accidentally’ continuing to operate under an expired agreement. Our renegotiations are planned and they are appropriate the customer’s situation, performance, industry norms. And of course, the increase in efficiency has meant that our professionals are able to focus time elsewhere – all those things they wanted to do, but never had time. That includes things like earlier engagement with the account teams, more involvement in shaping customer relationships, more time undertaking market research and benchmarks (we are in a sector where terms and conditions are in a real state of flux). As a result, we are far more visible and far more included in key discussions. Our technology has not only added value in its own right, it has enabled my function to become a new and vibrant source of added value to the business.”

 

E-signatures – slow progress?


In 2006, at an IACCM Americas conference, a group of senior attorneys ran a mock trial to test the enforceability of electronic signatures. They concluded that, subject to due process, such signatures are enforceable.

Since then, most countries have enacted legislation that supports electronic commerce, yet uptake remains patchy and many corporations are hesitant to adopt e-signing on a multi-country basis. In some cases, it is not only concerns about legal issues, but also fears of customer or supplier pushback. Others have found the charging model soon undermines anticipated savings.

So just how extensive is adoption and how many have overcome the challenges of implementation? What benefits are being achieved and what are the plans for the future? Questions such as these will be answered by a new IACCM survey that examines the current status of electronic signatures. The resulting report will be released to participants in the middle of October.

To complete the survey, visit https://www.research.net/r/levelsofadoptionofesignatures.

 

 

Digitizing contracts


It’s 25 years since big corporations started to automate and streamline internal data flows and communications. Given the impact that these changes had, it doesn’t take a brilliant mind to recognize the scale of cost and inefficiency associated with today’s semi-automated external communications and the virtual absence of automatically shared data. Essentially, the success of an organization such as Amazon is in large part because it has automated commerce, stripping out cost and simplifying the  customer and supplier experience.

Streamlining performance between organizations 

At IACCM, we have designated these inter-organizational tie-ups ‘RRP’, or relationship resource planning. The concept is increasingly understood by technology developers and executive management, but progress is slow. The complexity of contracts is a major barrier; right now, they are defying efforts at digitization due to a lack of standards in content, structure and design.

It is more than 50 years since Thomas Watson, founder of IBM, observed:”Design must reflect the practical and aesthetic in business, but above all, good design must primarily serve people”. And that, of course, is where the vast majority of contracts fail. Not only are they unintelligible to large swathes of the population, they are also unprogrammable, which means we cannot readily extract and communicate the data within them.

But that too is changing fast. Not only is there growing pressure to ‘design for users’, but advanced systems are increasingly able to extract and disseminate the data from contracts. Such systems are starting to consolidate and distribute information about performance, providing dynamic reports about individual agreements, and also across multiple agreements.

A pre-requisite to survival

The momentum is increasing and the pace is sure to accelerate because automated commerce will soon be a prerequisite to survival. Managing contracts is, for many organizations, their primary driver of costs. Even in manufacturing, where a relatively high proportion of contracts are for commodities and components, it represents a significant overhead. IACCM conferences and meetings this year have been focused on offering our members these insights to the future and connecting them to the resources that can equip them for success. Our Americas conference will continue this process.

In my next few blogs, I plan to feature several successful commercial groups – buy and sell – grasping this digital age and the opportunities it represents.

 

Strategic or administrative: which would you rather be?


Contracts – and especially contract management – continue in many organizations to be seen as largely administrative. For those who perform tasks in this area, that is never good news. Not only does it mean they lack influence and status, it means they are also often seen as dispensable.

As anyone who reads this blog on a regular basis will know, I strongly disagree with the view that contracting is an administrative activity. Yes, of course ithere are elements of the role that are administrative in nature, but that completely ignores the broader impacts of this discipline on an organization’s financial performance and reputation.

I was excited yesterday to participate in a webinar that was led by Jessica John, from Kaiser Permanente Northwest. Jessica told the story of KPNW’s recent implementation of contract management software (the recording of the webinar is available in the IACCM library). Two things especially struck me.

1. To generate understanding and gain senior management support for automation, Jessica had executives come to structured sessions with her team. The purpose of these sessions was to show the many interdependencies between the contracting process and broader business operations. They helped the executives understand how this ‘administrative’ activity was impeding business speed, agility and competitiveness. In other words, rather than trying to hide or deny the function’s ‘dirty linen’, Jessica used it to press the case for improvement.

2. To make their software implementation effective, Jessica worked with Ecteon, her selected provider, to ensure integration with other systems. Not only did this result in streamlined operational performance, it also led to cross-functional appreciation for the many tentacles of a holistic contracting process and generated a wealth of new business data.

Through these two measures, the business gained a fresh perspective and has come to appreciate the critical role of a coherent and high performing contracting process. Today, it sits firmly within the core functions that determine and implement strategy. For Jessica and her team, the benefits of that to the function and to the business more generally are already significant – but as she outlined, they have really only just begun their journey.

The key point here is that automation can be used to open doors and advance business contribution. Far from being a threat, it is an opportunity – and congratulations, Jessica, for grasping it!

Can business ever act morally?


The Royal Commission on Financial Services in Australia continues to unearth unprincipled and sometimes illegal activity within many of the industries leading players. These include the enormous scale of commissions paid for the sale of useless products.

In Sweden – yes, the land of ethical leadership – a former General Counsel is on trial for using bribes to win business in Uzbekistan. In the US, a pillar of society is accused of fomenting drug dependencies and seeking to benefit from the invention of an expensive remedy.

No matter where you turn, the stories of malpractice abound. Has it always been this way? The answer is surely yes, but today there is much greater exposure and stories that once were local are now global.

So on one level, you might say that things today are better because at least we know more about what is going on and there is some degree of accountability. Yet is that enough? Will society in general simply shrug its shoulders, or is this undercurrent of unethical business behavior eroding public trust to such a point that it threatens social structure?

These are big questions and I pose them on this blog because it might be argued that it is the duty of the modern commercial function (and each professional within it) to challenge the practices that lead to these unethical activities. In some instances, we have become part of the game. There are certainly lawyers who take the view that it is not so much about doing the right thing, but rather doing the things you can get away with. Procurement functions, when measured on savings, are too often complicit in manipulating the system to meet their measurements rather than the business interest. Contract managers may observe underlying dishonesty in the claims or commitments being made, even sometimes questionable payments, but do they question, or do they turn a blind eye?

Of course, one answer is ever greater levels of regulation, but is that really where we want to go? What sort of world will that create? Another view might be that since most of the unethical practices in business occur in the setting up and management of trading relationships, commercial staff are in a unique position to observe them. The big question, therefore, is what role might we play to raise the integrity of business dealings?

 

 

 

Are you running blind?


At the start of this week, I had two very different conversations. In each case, the conversation was with the global head of the Commercial & Contract Management function and in each case they were handling major outsourcing and services agreements. But at this point the story starts to diverge. They are summarized below:

Organization #1

  • Has been instructed to cut Its resources by a third
  • Is struggling to demonstrate specific value or explain what impact the headcount cut will have
  • Has been ‘too busy providing operational support’ to develop a forward-looking strategy
  • What technology?

Organization #2

  • Is experiencing sustained growth in functional status and budget
  • Has documented contribution of $60m cost reduction / revenue growth in first half 2018
  • Has an approved strategic plan and executive sign-off for forward investment
  • Has implemented technology to drive data, efficiency and value delivery

So what did they do differently?

Organization #1 is typical of so many – hard working, industrious, committed, but ultimately invisible in terms of value. When reviewing opportunities for cut-backs, executive management simply asked the question “Will it have any effect if we reduce headcount?” Even though there certainly will be an impact, there is no data to quantify this or to support the continued level of budget.

Organization #2 also kept busy – but with a somewhat different focus. Following a capability assessment undertaken by IACCM in 2017, it embarked on a program to ensure functional alignment with corporate goals and strategies and to gather data to demonstrate its business contribution. This led to a rapid review of the tasks being performed and ensuring that these were connected to quantifiable benefits.  A business case for small technology improvements that would streamline workload and support delivery of those benefits was approved in the summer of 2017.

As a result, the function has been able to show tremendous progress in the value it is adding.

• An average 25% reduction in contract cycle time due to easy search capabilities
• Regular management reporting on key business and commercial indicators
• A single, harmonized global process for document management
• A range of validated savings and revenue improvements through:

o Avoidance of de-scoping through contract interpretation and close client obligation management
o Obligation management – spotted and collected on missed rights that were not being exercised
o Avoidance of service credit payments
o Capturing service level earn-backs
o Cost avoidance via a decrease in maverick spend
o Improved oversight of renewals and consolidation opportunities

The Lesson

The lesson from this is rather self-evident. Don’t just assume that being busy translates to value. Far too often, groups fail to challenge what they are doing or how they are doing it. As a result, their work may fail to keep pace with changes in business strategy or priorities and almost certainly they lose visibility at senior levels.

It can be hard to self-challenge, which is why most successful groups gain some sort of extenral input. This could be through techniques such as a capability assessment, or it might be through gathering external benchmark data – simply finding out what others are doing. That could be through formal research, or more simply by attending roundtables, industry conferences or member meetings. IACCM offers all these things to its members – yet in common with other professional associations, we find only around 20% take advantage of what is on offer.

Finally, there is a method that doesn’t even require you to leave your seat. The IACCM Benchmark Study runs every three years and provides participants with comprehensive data (at no charge) which they can use to self-assess and have meaningful conversations with senior management.

So ultimately the lesson is, if you find yourself in the situation faced by Organization #1, there really is no excuse.

Will new technology mean the end of term agreements?


At a recent IACCM roundtable, participants discussed the seemingly insoluble issue of maximising value from supply relationships. It was widely agreed that loyalty and collaboration are important characteristics, since they support more open communication and opportunity evaluation. Yet loyalty and collaboration depend on levels of long-term trust and integrity that are rarely achieved. The key issues – especially for buyers – are ‘How do I stop suppliers taking advantage of me and how do I ensure I’m not overpaying or missing out on innovation?’

These questions are typically answered today by the use of regular competitive bids and, to a growing degree, through maintaining a market overview by Category Management teams. The problem is that competitive bidding – rather than keeping suppliers committed to value – actually tends to undermine performance. As with any relationship, behavior is impacted by the sense of durability.

Setting the term

This brings us to the point about a fixed contract term, something that is common in many agreements. In theory, the term sets a balance between the interests of buyer and supplier – long enough to make the supplier investment worthwhile, but not so long that the buyer feels trapped.

New technologies – and in particular new analytical tools – should have the potential to make fixed contract terms redundant. By aggregating all the elements of comparative operational cost (not just price), it ought to be possible to maintain dynamic benchmarks of supplier performance. As we all know, this is actually the critical data that represents a true measure of value. From a contract perspective, it would mean that there was objective assessment of the incumbent supplier and that they could be given clear improvement targets to retain the business.

Maintaining pressure on suppliers to perform is fair and reasonable. Using an arbitrary time period as the incentive is not only questionable in its effectiveness, but also imposes heavy cost burdens that ultimately translate into higher prices.